The Lloyds Bank/TSB Group merger is being structured as a reverse takeover by TSB. It will be effected through a scheme of arrangement between Lloyds Bank and its shareholders. TSB shareholders will receive a special dividend of 68.3 pence net per share.
The transaction is structured as a reverse takeover for several reasons, particularly to avoid the uncertainty of an offer or scheme of arrangement involving 1.15 million TSB shareholders.
Another major reason for the transaction being structured as a reverse takeover is the relationship between TSB and four charitable foundations established at the time of TSB's flotation. Under covenants binding on TSB, the foundations receive 1 per cent. of one third of TSB's profits for each preceding three year period.
The Foundations hold shares which are not entitled to any dividends and have only limited voting rights but which would convert into approximately 80 million TSB ordinary shares if TSB were to become a subsidiary of another entity.
The arrangements with the Foundations are a legacy from the privatisation of the bank in 1986, reflecting the role of the Trustee Savings Banks in their regions. It is unlikely that other listed companies could persuade their shareholders to accept similar arrangements as they obviously deter a potential hostile bid.
Even after the merger, the Foundations will receive the same proportion of the combined group's profits. This has apparently been taken into account in the terms of the merger.
It is relatively common for recommended offers to be effected by schemes of arrangement (see "Schemes of arrangement: using them in a recommended takeover", PLC, 1992, III(1), 17).
Under the terms of the Lloyds scheme, all shares in Lloyds will be cancelled. The reserve created by the cancellation will be capitalised and applied in paying up new shares which will be issued by Lloyds to TSB. As consideration for this issue, TSB (to be renamed Lloyds/TSB Group) will issue 2.704 shares to Lloyds shareholders for each share in Lloyds.
There are a number of advantages of a scheme, particularly where there are a large number of shareholders:
*Because the scheme provides for the cancellation and issue of new shares rather than the transfer of shares, there will be a substantial stamp duty saving.
*Provided that the scheme receives shareholder and court approval, it will be binding on all shareholders. The requisite shareholder approval is a majority in number representing three-quarters in value of members voting at the scheme meeting. This compares favourably with the 90 per cent. acceptance threshold on a bid before a bidder can compulsorily acquire the remaining shares. Shareholder apathy, which can result in a bidder not achieving the 90 per cent. threshold, is therefore not a problem on a scheme.
Presentationally, a scheme of arrangement has some attractions in a consensual merger in that it appears a more friendly process than an offer.
As part of the merger, TSB proposes to pay a special dividend of 68.3 pence net per share to its shareholders. This effectively constitutes a premium for TSB shareholders and avoids the enlarged group starting life with what was apparently seen to be excess capital.
The cash dividend should increase the attractiveness of the transaction to TSB's shareholders whose holdings in the combined group will be diluted substantially below their holdings in TSB. Some institutional shareholders will be able to reclaim the tax credit attaching to the dividend. CJM
*Freshfields and Theodore Goddard are TSB's legal advisers and Linklaters & Paines are Lloyds' legal advisers. Barings is Lloyds' financial adviser and JP Morgan is TSB's financial adviser.